A consumer proposal and bankruptcy are both formal insolvency processes in Canada, but they differ in how much you repay, what happens to your assets, and how long the effects last. This guide explains the key differences, consequences, and who to consult.
A consumer proposal and bankruptcy are two formal insolvency options available to individuals in Canada who cannot pay their debts. Both are governed by the Bankruptcy and Insolvency Act and administered by Licensed Insolvency Trustees, but they work very differently. A consumer proposal lets you propose a repayment plan to your creditors, often paying less than the full amount owed, while bankruptcy involves assigning your assets to a trustee in exchange for a discharge from most debts. Understanding these differences is essential before deciding which path might be appropriate for your situation.
| Feature | Consumer Proposal | Bankruptcy |
|---|---|---|
| What it is | A legal offer to unsecured creditors to settle debts for less than the full amount, often over up to five years. | A legal process where you assign your assets to a Licensed Insolvency Trustee, who sells them to pay creditors. |
| Who can file | Individuals with total debts below a limit set by the Bankruptcy and Insolvency Act (excluding mortgages on a principal residence). | Any insolvent individual, although some may be ineligible if they have been discharged from a previous bankruptcy within a certain period. |
| Assets | You generally keep your assets, but you may need to make payments based on your income. | Non-exempt assets are sold; provincial exemptions determine what you can keep. |
| Payments | Fixed monthly payments to the trustee, based on your offer; no interest accrues on included debts. | Possible surplus income payments if your income exceeds a threshold set by the Office of the Superintendent of Financial Institutions (OSFI); otherwise no monthly payments. |
| Duration | Typically up to five years, or shorter if you pay off early. | A first bankruptcy often lasts nine months if there is no surplus income; longer for subsequent bankruptcies or if you have surplus income. |
| Credit report impact | Remains on your credit report for a set period after completion. | Remains on your credit report for a longer period, typically six to seven years after discharge. |
| Effect on co-signers | Co-signers remain liable for the debt; the stay of proceedings does not protect them. | Co-signers remain liable for the debt; the stay of proceedings does not protect them. |
Both processes provide an immediate stay of proceedings, which stops most collection calls, wage garnishments, and lawsuits. However, the long-term consequences and the level of control you retain differ significantly. The table above gives a high-level comparison; the sections below explain the mechanisms in more detail.
How a consumer proposal works
A consumer proposal is a formal offer you make to your unsecured creditors. You propose to pay a portion of what you owe, either as a lump sum or as monthly payments over a set period, up to a maximum of five years. The offer is filed with a Licensed Insolvency Trustee, who reviews your financial situation and helps draft the proposal. Once filed, you make payments to the trustee, who distributes them to your creditors.
For the proposal to proceed, creditors representing a majority in value of the proven claims must accept it. If accepted, the proposal binds all unsecured creditors, even those who voted against it. Secured creditors, such as mortgage lenders, are not affected unless you choose to include them. A consumer proposal stops interest from accruing on the debts included, and after you complete all required payments, you are discharged from those debts.
One of the main advantages is that you keep your assets. You do not have to sell your home or car to fund the proposal, although you may need to make payments that reflect your ability to pay. The proposal is based on what you can afford, not necessarily what you owe. For more general information on loans and credit, see the the Financial Consumer Agency of Canada.
How bankruptcy works
Bankruptcy, also called an assignment in bankruptcy, is a legal process where you surrender your non-exempt assets to a Licensed Insolvency Trustee. The trustee sells those assets and distributes the proceeds to your creditors. In exchange, you receive a discharge from most unsecured debts after a set period. The length of the bankruptcy depends on your income and whether you have been bankrupt before. A first bankruptcy typically lasts nine months if you have no surplus income; if your income exceeds a threshold set by OSFI, you may have to make surplus income payments for a longer period, usually 21 months.
Bankruptcy provides immediate protection from creditors. The stay of proceedings stops collection agencies, wage garnishments, and lawsuits. However, it also means you may lose assets like a home, a car, or investments, depending on provincial exemption rules. Some debts, such as student loans (if you have been out of school for less than seven years), certain court fines, and child support, are not discharged by bankruptcy. Like a consumer proposal, bankruptcy appears on your credit report and can affect your ability to borrow for years. For information on how credit reports work, see the Financial Consumer Agency of Canada — credit reports and credit scores.
Key differences: assets, payments, duration, and credit
The most obvious difference is what happens to your assets. In a consumer proposal, you keep everything you own, but you commit to a payment plan. In bankruptcy, you may have to give up non-exempt assets, but you might have no monthly payments if your income is low. This trade-off is central to the decision.
Payments also differ. A consumer proposal requires fixed monthly payments for the duration of the proposal. Bankruptcy may involve surplus income payments if your income is above the OSFI threshold, but if your income is below that threshold, you may not have to make any payments beyond the trustee's fees. The duration of a consumer proposal is typically longer (up to five years) than a first bankruptcy (often nine months), but the monthly payments in a proposal are usually lower than what you would pay under a debt management plan.
Credit consequences are significant in both cases. A consumer proposal stays on your credit report for three years after you complete it, or six years from the date you filed, whichever comes first. A bankruptcy stays on your credit report for six years after discharge for a first bankruptcy, or seven years for a second. These are general guidelines from the credit bureaus, and they can affect your ability to get a loan, a credit card, or even a job that requires a credit check. If you are struggling with bad credit, see our guide to bad credit loans for options after insolvency.
Consequences for co-signers and joint debts
If you have a co-signed loan or a joint debt, both a consumer proposal and bankruptcy have serious implications for the other person. The stay of proceedings protects you from your creditors, but it does not protect your co-signer. The lender can still pursue the co-signer for the full outstanding balance, plus any interest that continues to accrue. This can damage the co-signer's credit and your relationship with them.
For example, if a parent co-signed a car loan for you and you file for bankruptcy, the lender can demand payment from the parent. The parent may have to pay the loan or face collection action. Similarly, if you have a joint credit card with a spouse, the spouse remains responsible for the entire balance. Before filing either a consumer proposal or bankruptcy, it is important to understand how it will affect anyone who co-signed or jointly borrowed with you. For a detailed explanation, see our guide on what it means to be a co-signer.
Who to consult and what to ask
A Licensed Insolvency Trustee is the only professional in Canada who can file a consumer proposal or bankruptcy. Trustees are regulated by the Office of the Superintendent of Financial Institutions (OSFI) and are required to explain your options and the consequences of each. Many trustees offer a free initial consultation. Non-profit credit counselling agencies can help you create a budget and may offer debt management plans, but they cannot file a consumer proposal or bankruptcy. You may also wish to consult a lawyer for legal advice.
During your consultation, ask specific questions: What are all my options? What will happen to my home and car? How will my credit be affected? What fees will I pay? How long will the process take? What happens if my income changes? How will this affect my co-signer? The Office of Consumer Affairs (ISED) provides general information on consumer rights and debt. You can also use our loan payment calculator to estimate payments under different scenarios.
Common mistakes to avoid
- Ignoring the problem. Debt does not go away on its own. Waiting can lead to wage garnishments and lawsuits.
- Using an unlicensed debt consultant. Only a Licensed Insolvency Trustee can file a consumer proposal or bankruptcy. Others may charge high fees without providing the same protections.
- Not disclosing all debts and assets. Failing to be fully transparent can lead to your proposal being rejected or your bankruptcy being extended.
- Assuming one option is always better. The right choice depends on your income, assets, debts, and goals. A trustee can help you compare.
- Forgetting about co-signers. As noted, co-signers remain on the hook. Not warning them can cause financial and personal harm.
- Missing payments on a consumer proposal. If you fall behind, the proposal can be annulled, and you may end up in bankruptcy anyway.
- Not checking your credit report afterward. Ensure that the accounts included in your proposal or bankruptcy are reported accurately and that your credit report is updated after discharge.